Earnings and sales decline, but revenue from cloud computing increases by 30%
By Asa Fitch
International Business Machines Corp.'s earnings declined in the second quarter against the backdrop of a pandemic that has roiled many of its corporate customers.
Armonk, N.Y.-based IBM had been searching for growth under new Chief Executive Arvind Krishna after several years of mostly declining revenue under his predecessor, Ginni Rometty. Cloud computing and artificial intelligence have become focal points in recent years for the 109-year-old company, which became a corporate mainstay with its mainframe computers and information-technology services.
But IBM officials and industry analysts have said some companies have been skittish about technology purchases with the economic uncertainty caused by the coronavirus. The pandemic prompted IBM in April to withdraw its full-year guidance. The company also laid off thousands of employees in the past two months, spurred by both the pandemic and a broader reorientation of its business.
IBM said Monday its second-quarter revenue fell by 5.4%, albeit a smaller decline than Wall Street analysts were forecasting, to $18.12 billion. Earnings per share also fell to $1.52 from $2.81 in the same period last year. IBM increased its gross margins and beat analysts' expectations for earnings on an adjusted basis.
Despite the rocky performance, IBM said its cloud-computing revenue was $6.3 billion during the second quarter, up 30% from a year earlier.
IBM's shares rose 4.5% in after-hours trading. The company's share price has fallen 5.7% this year, compared with a slight gain in the S&P 500.
IBM is one of the first big U.S. tech companies to report results for the second quarter. Chip maker Intel Corp. reports later this week, while Amazon.com Inc., Apple Inc., Google parent Alphabet Inc. and Facebook Inc. report quarterly financial results next week.
The U.S. technology sector has shown resilience in the coronavirus era as more people work from home and use computer hardware, software and internet services, but they haven't been immune to such negative effects as a drop-off in advertising and lower demand for smartphones.
IBM, for its part, sees a long-term opportunity amid the crisis as clients accelerate their digital transformations, Mr. Krishna said during a call with analysts. At the same time, some parts of the company are taking a short-term hit, including software businesses that rely on big transactions to grow.
"We're feeling the impact of austerity measures that businesses have put in place to preserve cash and capital," Mr. Krishna said.
Still, Chief Financial Officer James Kavanaugh said the company was in a stable position given its wide global footprint and a customer base that includes many resilient companies in critical industries.
In recent months, IBM bolstered its cloud-computing business despite the pandemic by signing deals with auto maker Daimler AG and Indian telecom Bharti Airtel Ltd. Mr. Krishna said that there were increasing opportunities for large and transformational projects, but that they also "take time to shape and therefore to close."
IBM wants to be a leading cloud-computing player, but it is behind the competition, led by Amazon and Microsoft Corp., who make money by renting out computing power to companies and consumers. It is working to lead deployments of what it terms the hybrid cloud, a technology model where companies do some of their computing work in large external data centers but also maintain their own digital infrastructure.
Last July, IBM closed its acquisition of open-source software company Red Hat for $33 billion in a bid to bolster its cloud-computing position. Red Hat's sales rose 17% in the quarter, IBM said, although because of accounting rules, IBM can't report all of Red Hat's revenue even though it has to absorb all its costs.
IBM doesn't report how much money it makes in artificial intelligence, its other area of focus.
As part of its turnaround efforts, IBM has shed or reorganized parts of its business that don't align with its new mission. It has been focusing recently on revamping its global technology services division, which provides IT outsourcing and support services. Mr. Kavanaugh said in April that moves to restructure that business would result in nearly $2 billion of annual savings.
Technology services revenue in the April-to-June period was $6.32 billion, down 8%. IBM has been trying to reverse the division's revenue slide by refocusing it on cloud-computing services. Cloud-related revenues within the division were up 18% in the quarter, IBM said.
Among its other main segments, Global Business Services, which focuses on consulting and other management services, made $3.89 billion of sales during the quarter, down 7%, IBM said. Its Cloud and Cognitive Software division's revenues rose 3% to $5.75 billion.
Write to Asa Fitch at email@example.com